Morter v. Farm Credit Services

• Decision Date: 16 July 1991
• Docket Number: No. 90-1534,90-1534
• Citation: 937 F.2d 354
• Parties: , 21 Bankr.Ct.Dec. 1525, 69 Ed. Law Rep. 1023, Bankr. L. Rep. P 74,050, 14 Employee Benefits Ca 1001 Raymond Lione MORTER, aka d/b/a Swinengineering, Inc., Debtor-Appellant, v. FARM CREDIT SERVICES, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 354

937 F.2d 354

60 USLW 2138, 21 Bankr.Ct.Dec. 1525,

69 Ed. Law Rep. 1023,

Bankr. L. Rep. P 74,050,

14 Employee Benefits Ca 1001

Raymond Lione MORTER, aka d/b/a Swinengineering, Inc. Debtor-Appellant, v. FARM CREDIT SERVICES, Defendant-Appellee.

No. 90-1534.

United States Court of Appeals Seventh Circuit.

Argued Dec. 12, 1990.

Decided July 16, 1991.

Chet Zawalich, Boynton, Kamm & Esmont, South Bend, Ind., for Farm Credit Services.

Carolyn S. Holder, Holder & Davis, Lafayette, Ind., Elizabeth A. Justice, Wernle, Ristine & Ayers, Crawfordsville, Ind., for Raymond L. Morter.

Leonard Opperman, George T. Patton, Jr., Bose, McKinney & Evans, Indianapolis, Ind., for amius curiae Teachers Ins. and Annuity Ass'n of America and College Retirement Equities Fund.

Before BAUER, Chief Judge, and FLAUM and KANNE, Circuit Judges.

BAUER, Chief Judge.

Raymond Lione Morter served as a professor of veterinary science at Purdue University for more than thirty years. He was forced to retire at age seventy in the fall of 1990 because of Purdue's mandatory retirement policy. As a condition of his employment at Purdue, Morter was required to participate in Purdue University's retirement plan, the Teacher's Insurance and Annuity Association of America/College Retirement and Equity Fund ("TIAA-CREF"). Although a participant may make voluntary payments to the plan, Morter chose not to do so; Purdue paid all preretirement contributions on his behalf.

The retirement plan in question--TIAA-CREF--provides funding for the retirement programs of over half a million employees in over 3000 colleges and universities. See generally Peters v. Wayne State University, 476 F.Supp. 1343, 1346 (E.D.Mich.1979), rev'd, 691 F.2d 235 (6th Cir.1982). The TIAA component of the plan is a nonprofit, legal reserve life insurance policy that promises to pay a fixed annuity for life based on a contractually guaranteed rate of return, plus dividends, when a beneficiary reaches retirement age. When a participant retires, TIAA applies preretirement contributions to purchase a fixed annuity contract for the participant's benefit. TIAA places the preretirement accumulations in the payout annuity pool. The plan then evaluates the participant's life expectancy and calculates benefits for him. The plan adjusts the benefits of all other participants in the annuity pool based on that expectancy. If the participant dies before the time projected, the other participants in the pool will have more funds available to them. If the participant outlives TIAA's projection, the contributions of the other participants to the annuity pool will be used to continue the contractually guaranteed benefits and dividends as declared. Annuity income begins not later than April 1 of the calendar year following the year in which an annuitant attains the age of 70 1/2 years.

CREF is a companion nonprofit corporation created to invest in financial instruments other than those traditionally permitted for fixed annuity funds like TIAA. Unlike TIAA, CREF provides an annuity that varies with the success of its investments.

The strict anti-assignment provision of TIAA-CREF makes it impossible for annuitants to reach the funds in their accounts before retirement. See Connick v. Teachers Insurance and Annuity, 784 F.2d 1018, 1021 (9th Cir.) (annuitant may not reach assets of TIAA-CREF plan until retirement, and then only as set forth in the plan), cert. denied, 479 U.S. 822, 107 S.Ct. 91, 93 L.Ed.2d 43 (1986). The TIAA and CREF contracts state that the plan makes "no provision for cash surrender or loans and cannot be assigned." The TIAA contract specifically provides:

16. No assignment. Any assignment or pledge of this contract or of any benefit hereunder will be void and of no effect.

17. Protection Against Claims of Creditors. The benefits, options, rights, and privileges accruing to any Beneficiary will not be transferable or subject to surrender, commutation, or anticipation, except as may be otherwise endorsed on this contract. To the extent permitted by law, annuity and other benefit payments will not be subject to claims of any creditor of any Beneficiary or to execution or to legal process.

Clause 17 of the CREF contract contains similar language protecting benefits against the claims of creditors. Pursuant to these provisions, Morter had no access to the accumulation of assets in the TIAA-CREF retirement plan short of retirement or death.

In June 1986, Morter filed a voluntary petition for bankruptcy pursuant to Chapter 7 of the Bankruptcy Code, 11 U.S.C. Secs. 101-1330 (1978). A bankruptcy estate consists of "all legal and equitable interests of the debtor in property as of the commencement date." 11 U.S.C. Sec. 541(a)(1). Sections 522 and 541 of the Code permit a debtor to retain certain assets. In particular, section 541(c)(2) provides, "A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title." Thus, if state law prevents a creditor from reaching certain income payable at a future date, then the Bankruptcy Code similarly will treat that income as outside the bankruptcy estate and unreachable by creditors.

On his schedule listing property exempt from the bankruptcy estate, Morter listed his interest in the TIAA-CREF retirement plan at $280,795.86. Both the Farm Services Credit of Madison, Wisconsin (d/b/a Product Credit Association and d/b/a The Federal Bank Association) and the United States Trustee objected to the claimed exclusion of the TIAA-CREF retirement plan, so the matter was submitted to the bankruptcy court for decision. On July 6, 1989, the court issued a Memorandum and Order sustaining the objections to Morter's claimed exemptions. The court ruled that the retirement plan was the property of the bankruptcy estate and that the only exemption Morter could take was a $100 intangible personal property right allowed by Indiana law. See Ind.Code Sec. 34-2-28-1(a)(3) (1980). On February 6, 1990, the district court issued a Memorandum Opinion and Order that vacated in part and affirmed in part the judgment of the bankruptcy court. From that judgment, Morter brought a timely appeal.

State law determines whether access to a fund is sufficiently restricted to qualify for exclusion from the bankruptcy estate. The TIAA and CREF contracts expressly state that New York law governs their interpretation. Applying New York law, the district court concluded that the CREF component of the retirement plan was excluded from the bankruptcy estate, but that the TIAA component was not. See Morter aka d/b/a Swinengineering, Inc. v. Farm Credit Services, 110 B.R. 390, 393 (N.D.Ind.1990). The basis for the dissimilar treatment was TIAA's provision of a fixed annuity that carried the possibility that the plan administrators might have to invade the corpus to pay the promised benefits if the fund suffered a shortfall in any given year. The district court characterized this benefit scheme as an annuity, not a trust. In contrast, CREF does not guarantee annuitants a fixed dollar amount but, rather, a variable share.

In order to decide whether the TIAA-CREF was excluded from Morter's bankruptcy estate under section 541(c)(2) of the Bankruptcy Code, the district court examined in some detail the legislative history of the provision. The court determined that Congress intended to exclude from bankruptcy estates only "traditional"--i.e., donative--spendthrift trusts under applicable nonbankruptcy law. See Morter, 110 B.R. at 395. See also H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 369, reprinted in 1978 U.S.Code & Admin.News 5963, 6325; S.Rep. No. 95-989, 95th Cong., 2d Sess. 83, reprinted in 1978 U.S.Code & Admin.News 5787, 5869. Characterizing a retirement plan as a spendthrift trust is simply another way of stating the conclusion that it must be excluded from the bankruptcy estate. A spendthrift trust is one "created to provide a fund for the maintenance of a beneficiary and at the same time to secure the fund against his improvidence or incapacity." Black's Law Dictionary 1400 (6th ed. 1990). The classic example of such an arrangement is the trust a parent might set up for an irresponsible child who might fritter away the funds before reaching majority. Of critical importance, then, is whether a fund has access restrictions similar to those of a spendthrift trust, which "place the fund beyond the reach of the beneficiary's creditors, as well as ... secure the fund against the beneficiary's own improvidence." Matter of Goff, 706 F.2d 574, 580 (5th Cir.1983).

Morter believes that the district court over-emphasized the importance of the fact that TIAA someday might have to reach into its own funds. In this appeal, both he and amicus curiae TIAA-CREF argue that, in reviewing pension plans to determine whether they are included or excluded from the bankruptcy estate, courts properly should focus on whether the debtor has access to the funds. If, as here, the debtor's access is restricted by a ban on receiving any of the funds until retirement, a prohibition against lump sum distributions, and restrictions on alienation, the pension should be excluded from the bankruptcy estate.

Courts are split on the standards for determining whether a given set of restrictions on transfer and debtor access are sufficient to warrant the exclusion of a retirement or pension plan from a bankruptcy estate under 11 U.S.C. Sec. 541(c)(2). Some have held that the plan must constitute a traditional spendthrift trust under applicable state law. See, e.g., In re Swanson, 873 F.2d 1121, 1123 (8th Cir.1989); In re Lichstrahl, 750 F.2d 1488, 1490 (11th Cir.1985); Goff, 706 F.2d at 587. Cf. In re Nadler, 122 B.R. 162, 166 (Bankr.D.Mass.1990) (section 541(c)(2) applies only "to the type of trust that traditionally has contained restrictions on assignments and not to trusts involving employee...